OnStartups

First off, let me begin with a disclaimer: I AM NOT A LAWYER, I don't play
one on TV and I don't play golf with lawyers on Sundays (I don't play golf at
all).

None of the content from this article or any other article on this blog
should be taken as legal advice. If you have a situation that does require
professional legal advice, please seek legal counsel.

The following are some tips from my own personal experience working in and
around startups. Clearly, your situation is different, but I have found that
there are often "patterns" in early-stage startups. These tips are written from
the basis of an early-stage startup with just one or two founders. It's based
on startups in the U.S. (I've never started a company anywhere else). It's not
meant to be exhaustive or detailed, but to just provide some of the core
elements that startups usually consider when contemplating whether or not they
need to hire a lawyer.

When You Need A Startup Lawyer (and When You Don't)

1. Company Formation: Usually, the early process of
formalizing your company (creating an Inc. or LLC) does not require a lawyer to
get the paperwork done. The decision of what type of company to form (C-Corp,
S-Corp, LLC, etc.) is situational but there is plenty of information on the web
to help make this decision yourself, in most cases.

2. Operating Agreement: This one's a bit more
complicated. If you need to have an operating agreement (that defines
the rules by which the company will be run), you'll probably need some legal
help. Operating agreements can be complicated (though a fair amount is
boiler-plate). Usually, single-person entities don't need a sophisticated
operating agreement, but as the team grows and you need to structure control and
governance better, this will likely become necessary. Even if it's not a full
operating agreement, you'll likely need something that defines how big decisions
get made, the terms for anyone that holds stock in the company, vesting periods,
termination clauses, etc. Once the company consists of more than just one
person, it becomes increasingly important to define these things.

3. Employee Agreements: It may be advisable that you have
each of the employees of the company (including yourself) sign some basic
agreements such as non-competition, non-soliciation, etc. These are usually
pretty straight-forward and samples can be found online. Common things to see
here are what an employee can't do after she leaves the company for some period
of time (often a year or two). Examples include: Not working for a
competitor. Not soliciting other employees to leave. Not taking client lists.
Not revealing company secrets. The documents can range from reasonably simple
and boiler-plate to pretty complicated (based on what your needs are).

4. Trademarks: If you intend not to hire a lawyer in the
early days, you should probably at least do a basic search for your company name
to see if the trademark is available. This can be done at the U.S. Patent and
Trademark Office website. I generally don't worry about registering trademarks
in the early, early days of a company as it's rarely the case that trademarks
have been an issue. At some point, you'll likely want to trademark your company
name, product name, etc. On a related note, I'd advise against trying
to find an available trademark -- registering it, and then trying to use it to
get a domain name from someone that owns it. This is painful. When picking a
name, just find a domain that's already freely available (or available for
sale).

5. Patents: Patents in the software industry are still
hotly debated but can be an important asset for you in certain situations. I'm
not going to tell you when you should or shouldn't patent. But, if you do
decide to try filing a patent, you'll likely need a lawyer to help work it
through the system. Also, do some basic reading on the web on what not to do
should you intend to file a patent (like talk about the basics of the patent
publicly too early). You may also want to consider filing a "provisional
patent" which is much easier and helps lay some groundwork should you decide to
file a full patent someday.

6. Financing/Investors: If you're going to raise money
from outside individuals (particularly VCs), you're going to need a lawyer.
Probably a really good one that has experience executing financing transactions
for startups. In most cases, you (the company) pays for all legal fees --
including theirs. Prepared to be annoyed/irritated/offended at the
high costs for executing what you would think would be a "standard" transaction
with lots of boiler-plate terms. I don't know why it costs so much, I just know
that it does

What I would do (though this may seem out of order to some): Have the idea.
Find suitable domain name and company name. Create the entity (either S-corp or
LLC). Work like heck to build something. Attract team members and/or
co-founders. Then, engage a lawyer that has tons of experience dealing with
startups and have her work on the basic corporate docs we need. If done right,
this same lawyer should be able to help with the legal side of the first round
of financing (if there is one).

A couple of things in closing. When you're hiring a lawyer for your startup,
it's important to remember that the she represents the company -- not
you. In most (but not all) cases, the company's interests and your
interests are aligned. But, as the company evolves and grows, interests can
diverge.

This article was prompted by an email from a regular reader of
OnStartups.com. If you have topics that you'd like covered, please leave a
comment.

5. On Trademarks and Naming: Athol Foden at Brighter NAming (http://www.brighternaming.com) has a great site and a great service for early stage startups. We interviewed him here:http://www.skmurphy.com/blog/2007/11/30/think-you-have-a-great-name-think-again/6. You don't need an attorney to file a patent, you can use a registered patent agent.We interviewed Pete Tormey of Action Patents http://actionpatents.com/ here,http://www.skmurphy.com/blog/2007/12/06/legal-issues-qa-with-pete-tormey-of-action-patents/you can also work with a registered patent agent to file a patent.

brk

While I tend to agree, I found that when I formed my first company the $400 (IIRC) I paid to a lawyer to handle all the docs was invaluable to me. When the process was finished, I knew I had all the right papers and payments sent to all the right places, and I had some guidelines about what needed to be done or maintained (like holding meetings, filing minutes, etc) in order for the corporation to maintain its validity, and thereby reduce my personal liabilities. Although, I did follow your other advice above, in that I didn't officially incorporate until I had already prototyped my business idea and saw that there was a need to do so.

By far the most crucial in my experience is to get an attorney involved in the financing process. Almost everything else is resource dependent. My two cents. More tips herehttp://blogs.jobdig.com/wwds/2007/12/10/a-complete-list-of-100-attributes-off-people-who-start-companieshow-you-can-be-one-of-americas-entrepreneurs/

Just a quick note from the dark side. I have been representing startups and small businesses for nearly three decades and actually agree with much of what you say about when a lawyer is needed - but, when founding teams are involved, this FAQ at my site goes into considerable depth on the distinctives of a startup which definitely do require a lawyer (see http://www.grellas.com/faq_business_startup_001.html)

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